Facing The Giants

THE RULES of the game are changing in the pharmaceutical industry. A number of antagonistic pressures are bearing down on big drug firms, forcing them to adopt new business models aimed at preserving profit levels that have long been the envy of other industries. High on drug companies' list of concerns are regulators' increased scrutiny of their products and escalating competition from generic drug producers, which are pouncing on markets that patent expirations of blockbusters are opening up.

This year alone, an estimated $18 billion of branded products will have lost patent protection, according to IMS Health. They include Johnson & Johnson's Risperdal for schizophrenia; Merck & Co.'s Fosamax for osteoporosis; Abbott Laboratories' Valcote for epilepsy, bipolar disorder, and migraines; and Pfizer's Norvasc for high blood pressure and angina.

Generics competition is becoming "more aggressive and more serious," says Ludwig Hantson, head of Novartis' pharmaceutical business in North America. "We are seeing challenges to patents earlier in the product life cycle. In addition, more generics are being launched at risk, before patents expire and while litigation is still pending," he says.

That's not to say that generic drug firms are having a field day. Despite their aggressive moves, sales growth of generic drugs slowed somewhat this year, says Diana Conmy, corporate director for market insights at IMS Health. In the top eight global markets—the U.S., Japan, France, Germany, Italy, the U.K., Spain, and Canada—generics sales grew only 2.1% in the 12 months ending June 2008.

In 2009, generics sales will grow 5 to 7% to about $70 billion in the top eight markets, down from 8% sales growth in 2007, IMS Health predicts.

The staid growth is the result of increasing penetration and competition in the larger, more mature generics markets like the U.S. and U.K., Conmy says. The trend is bringing prices down even while sales volume continues to rise, she adds. "As a result, I think you'll probably see more consolidation of generics companies" beyond the deals that have recently occurred, she adds. For example, in July, Jerusalem-based Teva Pharmaceutical Industries, the world's largest generic drug company, agreed to acquire Montvale, N.J.-based Barr Pharmaceuticals, the fourth largest generics company, for $7.5 billion and the assumption of $1.5 billion in debt.

Through such deals, generics firms are positioning themselves to take advantage of the wave of drug products with patents that will expire soon. An additional $24 billion of branded products—including antiepileptics, proton pump inhibitors, and antivirals—will lose their market exclusivity in the top eight markets in 2009, according to IMS Health. Among the leading products slated to go off patent next year are Takeda Pharmaceuticals' Takepron ulcer treatment and GlaxoSmithKline's Valtrex herpes treatment, Conmy says. Perhaps the most widely anticipated patent expiration is for Pfizer's statin blockbuster Lipitor, which will lose protection in 2010.

In total, about $137 billion in drug sales are at risk due to generics competition from patent expirations from 2008 through 2012, according to IMS Health.

In addition to fending off generics competition, pharmaceutical companies have had to deal with increased scrutiny from regulators around the world, Conmy says.

This year, several high-profile drugs have stalled in the approval process due to regulatory action. In April, Merck received a nonapprovable letter from the Food & Drug Administration for Cordaptive, a combination of niacin and laropiprant for treatment of hyperlipidemia and cardiovascular disease. Merck plans to file a complete response to the FDA letter no earlier than 2010.

In another move in April, FDA issued a nonapprovable letter for an allergy drug that is a combination of Merck's Singulair and Schering-Plough's Claritin. The companies later withdrew the application and terminated the joint venture they formed to develop the product.

In addition, Wyeth Pharmaceuticals received two letters from FDA for two different New Drug Applications for Viviant: one in December for the prevention of postmenopausal osteoporosis and another in May for the treatment of the disease. Both requested analyses concerning the incidence of stroke and venous thrombotic events. Wyeth plans to submit a complete response for both NDAs in the first half of 2009.

FDA approved only 18 new drugs in 2007, compared with 22 in 2006, according to the agency. And Novartis' Hantson believes that the agency is on pace to approve no more than the 18 it has to date this year. That would make 2008 another one of the slowest years for new drug approvals in the past five years, he says.

At least in the near term, new product approvals are expected to remain at historically low levels, with only 25 to 30 new chemical entities slated for launch worldwide in 2009, IMS Health says.

Some already-marketed products are coming under fire, too. For example, in January, FDA said it was continuing to review Vytorin. The product combines two cholesterol-lowering drugs: Zocor, made by Merck, and Zetia, made by Schering-Plough. The companies agreed to conduct another trial to evaluate adverse health effects. Meanwhile, worldwide third-quarter sales of Vytorin were $567 million, down 18% compared with third-quarter sales in 2007, according to Merck.

Given increased scrutiny from regulators, intensifying generics competition, and other outside pressures, "there's no question that the pharma landscape has changed dramatically in recent years," Hantson says.